Following initial reports that Middle Eastern Group Zain had put its African operations up for sale, the company has now indicated that it was in preliminary talks with three potential buyers, including two Indian companies. In a previous Investor Note, we posited that Zain had good cause for selling its African operations. With an initial (and in our view, on the high side) valuation of $12bn floated around, the central, ultimate question now centers around the fair value of the Zain Africa business (excluding Sudan and Morocco, which would not be part of the deal). We add our own rather speculative grist to this mill, and find valuing Zain Africa somewhat of a Gordian knot.

Will investors value the African unit on the basis of what it has been, a highly profitable first tier pan-African operation? Or will they put more weight on company performance over the past 18 months, which offers some hints of vulnerability in a market whose catalysts of profitability are rapidly mutating? In the answers to these questions lie the variation between a valuation at $6bn and a valuation closer to $10bn.

 In a new AfricaNext Investor Research Note, we argue that Zain Africa has to be valued conservatively, as an operation with good upside, which faces significant internal and external challenges going forward. We estimate Zain Africa’s enterprise value at about 5x-7x 2008EBITDA, a range of $7bn to about $10bn, including a premium for extensive pan-African coverage. We also say that Zain should either sell the entire Africa unit as a whole, or not at all.

 The full Research Note is available in the Member-Only section of our web site (subscription is easy and free, but required).